Chinese Economic Performance in the Long Run: Reformist Policies since 1978 Produced Three Decades of Dynamic Growth

Reformist Policies since 1978 Produced Three Decades of Dynamic Growth

There were several forces which contributed to the greater efficiency and faster productivity
growth after 1978.

Peasants regained control and management of their land. The average production unit became the farm household employing 1.4 persons on less than half a hectare. There were better prices for farmers and greater access to markets. The result was a big improvement in incentives and productivity.

There was a huge expansion of small–scale industry, particularly in rural areas. The average size of state enterprise did not change, but in the non-state sector it fell from an average of 112 to 8 employees per firm by 1995. Productivity growth was much faster in the non–state sector, which had lower labour costs, virtually no social charges, much smaller and more efficient use of capital.

China made massive strides to integrate into the world economy. The state monopoly of foreign trade and the policy of autarkic self–reliance were abandoned after 1978. Foreign trade decisions were decentralised. Between 1980 and 1997 there was a five–fold devaluation of the yuan. Special enterprise zones were created as free trade areas. In response to the greater role for market forces, competition emerged, resource allocation was improved and consumer satisfaction increased. The volume of exports rose by 15 per cent a year from 1978 to 2006 and China’s share of world exports rose from 0.8 to 8 per cent. If Hong Kong exports are included, China was the world’s biggest exporter ($1 286 billion, 10.7 per cent of the total) in 2006, Germany was second with $1 126 billion, the United States third with $1 036 billion, Japan fourth with $650 billion and Russia seventh with $305 billion. Its integration in the world economy has been furthered by reduction of its own trade barriers and the greater security of its access to foreign markets thanks to its membership in the World Trade Organization.

In 1978 China had no foreign debt and received virtually no foreign investment. The annual inflow of direct foreign investment rose slowly to $3.5 billion in 1990, but by 2005. it had risen to $60 billion. The total inflow from 1979 to 2005 was more than $620 billion. Chinese foreign borrowing has been relatively modest, a total of $147 billion between 1979 and 2005, most of it long or medium term. The debt structure presents negligible exposure to sudden changes in foreign confidence, the Peoples’ Republic has never been in arrears on foreign debt and had accumulated huge foreign exchange reserves of $1.2 trillion early in 2007. It has become a significant investor and supplier of foreign aid to countries which supply it with oil and raw materials. China’s opening to the world economy has been remarkably trouble free by comparison with the situation in some other Asian and Latin American countries and the successor states of the USSR.

As a consequence of successful policy in the reform period, Chinese per capita income rose by 6.6 per cent a year from 1978 to 2003, faster than any other Asian country, very much better than the 1.8 per cent a year in western Europe and the United States and four times as fast as the world average. Per capita GDP rose from 22 to 74 per cent of the world level. Its share of world GDP rose from 5 to 15 per cent and it became the world’s second biggest economy, after the United States. The big question is how long this catch–up process can last and how far it can go?